New Delhi: The government on Wednesday kicked off its ambitious plan to merge state-owned oil companies.

The Union cabinet approved Oil and Natural Gas Corp.’s (ONGC’s) proposal to acquire a majority stake in public sector refiner Hindustan Petroleum Corp. Ltd (HPCL), creating an integrated energy giant.

A merger of the existing 11 government oil companies was proposed by finance minister Arun Jaitley in Union Budget 2017. The idea was to create better efficiencies and also an oil company that would be better placed to compete globally to acquire hydrocarbon resources.

A person with knowledge of the development confirmed that the cabinet had approved the proposed transaction.

In a separate decision, the cabinet also approved creation of a new exchange-traded fund (ETF) for monetizing its stake in state-owned companies, banks and insurance firms without losing management control. While the government will retain only 51% in disinvested companies, it will retain 52% in financial institutions.

The cabinet approved “disinvestment in respect to public sector banks, other listed public sector financial institutions and public sector insurance companies (when listed) through ETF or other methods, subject to government retaining 52%", an official statement said.

Kalpesh Mehta, partner at Deloitte Haskins and Sells, said that clubbing different assets together under an ETF is an efficient way of disinvestment from the perspective of valuation.

Divestment of the 51.11% stake in HPCL to ONGC may fetch the exchequer about Rs20,000 crore based on HPCL’s closing share price on Wednesday.

ONGC shares closed 0.8% higher at Rs163.05 on the BSE and HPCL shares gained 4.14% to close at Rs384 on a day the benchmark Sensex gained 0.77% to 31,955.35 points.

While the deal will enable the government to meet part of its Rs72,500 crore disinvestment target for the year, officials clarified that raising revenue was not the chief goal of the transaction.

“Creating an integrated energy company of global scale is the stated objective of the transaction. Receipt of the sale proceeds is only incidental," said an official who spoke on condition of anonymity.

Now, ONGC’s board of directors have to approve the transaction and seek approval from all shareholders before seeking a high court endorsement of the transaction. The government expects to complete the whole process by the end of this financial year.

ONGC, which has announced heavy investments in its deepwater block in the Krishna-Godavari basin, may finance part of the transaction through borrowing. The company has cash reserves of about Rs13,000 crore.

Emails sent to ONGC and HPCL on Wednesday evening remained unanswered.

Sector experts welcomed the proposed transaction.

Stakeholders are looking forward to the integrated oil company encompassing ONGC, HPCL, Mangalore Refinery and Petrochemicals Ltd—a subsidiary of ONGC—and ONGC Videsh Ltd as an opportunity for value creation, said Deepak Mahurkar, leader of the oil and gas practice at PwC India.

“For years to come, the conglomerate will try to be better than domestic and global rivals in areas like crude oil, gas, products, petrochemicals, infrastructure and trading," said Mahurkar.

The cabinet also approved a revision of guidelines for the Indian Community Welfare Fund aimed at assisting Indian nationals abroad during any emergency.

In another decision, the cabinet also approved signing of a memorandum of cooperation on tax issues between India and its fellow members in the BRICS grouping. BRICS stands for Brazil, Russia, India, China and South Africa. The agreement will promote cooperation between BRICS revenue administrations for capacity building and knowledge sharing, an official statement said.

Sayantan Bera and Shaswati Das contributed to this story.

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